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By the end of this section, you will be able to:

  • Understand the arguments for and against requiring the U.S. federal budget to be balanced
  • Consider the long-run and short-run effects of a federal budget deficit

For many decades, going back to the 1930s, proposals have been put forward to require that the U.S. government balance its budget every year. In 1995, a proposed constitutional amendment that would require a balanced budget passed the U.S. House of Representatives by a wide margin, and failed in the U.S. Senate by only a single vote. (For the balanced budget to have become an amendment to the Constitution would have required a two-thirds vote by Congress and passage by three-quarters of the state legislatures.)

Most economists view the proposals for a perpetually balanced budget    with bemusement. After all, in the short term, economists would expect the budget deficits and surpluses to fluctuate up and down with the economy and the automatic stabilizers. Economic recessions should automatically lead to larger budget deficits or smaller budget surpluses, while economic booms lead to smaller deficits or larger surpluses. A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.

Some supporters of the balanced budget amendment like to argue that, since households must balance their own budgets, the government should too. But this analogy between household and government behavior is severely flawed. Most households do not balance their budgets every year. Some years households borrow to buy houses or cars or to pay for medical expenses or college tuition. Other years they repay loans and save funds in retirement accounts. After retirement, they withdraw and spend those savings. Also, the government is not a household for many reasons, one of which is that the government has macroeconomic responsibilities. The argument of Keynesian macroeconomic policy is that the government needs to lean against the wind, spending when times are hard and saving when times are good, for the sake of the overall economy.

There is also no particular reason to expect a government budget to be balanced in the medium term of a few years. For example, a government may decide that by running large budget deficits, it can make crucial long-term investments in human capital    and physical infrastructure    that will build the long-term productivity of a country. These decisions may work out well or poorly, but they are not always irrational. Such policies of ongoing government budget deficits may persist for decades. As the U.S. experience from the end of World War II up to about 1980 shows, it is perfectly possible to run budget deficits almost every year for decades, but as long as the percentage increases in debt are smaller than the percentage growth of GDP, the debt/GDP ratio will decline at the same time.

Nothing in this argument should be taken as a claim that budget deficits are always a wise policy. In the short run, a government that runs a very large budget deficit can shift aggregate demand to the right and trigger severe inflation. Additionally, governments may borrow for foolish or impractical reasons. The Macroeconomic Impacts of Government Borrowing will discuss how large budget deficits, by reducing national saving, can in certain cases reduce economic growth and even contribute to international financial crises. A requirement that the budget be balanced in each calendar year, however, is a misguided overreaction to the fear that in some cases, budget deficits can become too large.

No yellowstone park?

The federal budget shutdown of 2013 illustrated the many sides to fiscal policy and the federal budget. In 2013, Republicans and Democrats could not agree on which spending policies to fund and how large the government debt should be. Due to the severity of the recession in 2008–2009, the fiscal stimulus, and previous policies, the federal budget deficit and debt was historically high. One way to try to cut federal spending and borrowing was to refuse to raise the legal federal debt limit, or tie on conditions to appropriation bills to stop the Affordable Health Care Act. This disagreement led to a two-week shutdown of the federal government and got close to the deadline where the federal government would default on its Treasury bonds. Finally, however, a compromise emerged and default was avoided. This shows clearly how closely fiscal policies are tied to politics.

Key concepts and summary

Balanced budget amendments are a popular political idea, but the economic merits behind such proposals are questionable. Most economists accept that fiscal policy needs to be flexible enough to accommodate unforeseen expenditures, such as wars or recessions. While persistent, large budget deficits can indeed be a problem, a balanced budget amendment prevents even small, temporary deficits that might, in some cases, be necessary.

Questions & Answers

what is economics
Sarfo Reply
balance of trade
Sarfo
then what's the meaning of Demand
Sammy Reply
boss wetin you dey do for here Sammie rose
adedokun
what is probability
mohamed Reply
state the law of demand
onu Reply
law of demand states that the higher the price the lower the quantity demanded and vice versa in propotiona to varieties of commodity
oloja
proportion of*
oloja
The law states that all other things being equal at higher price less commodity demanded and at lower price more commodity demanded
Eliah
thanks
onu
it states that the higher the price,the lower the quantity demanded and the lower price,the higher quantity demanded
Akale
what is scarcity
Wireko Reply
what are some the problems of scarcity
Wireko
The economic problem of sacrtiy only be solved if there is an economic efficiency
Shoaib
inflation
Suleman
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Okwori
Scarcity is an economic good that is limited in supply.
tomi
inflation
Spark
Rise in gernal price level from previous year
Shoaib
it is the limited supply of resources
Abdul
Scarcity is the limitedness in supply in relation to the commodity under consideration
Ayiku
who is the father of economics
Acquah Reply
Adam Smith...
Chris
adam smith father of modern economics alfred Marshall father of micro economics john Maynard Keynes father of macro economics
vinay
Adam smith
Esther
Adam smith is the father of classical economics.
yusuf
david recardo
Tariku
Admin smith
Shoaib
The economic field existed because of the limited resources and unlimited human wants. why is it so?
Eliud Reply
state the law of diminish return
Abobarin
the law of diminishing returns states that every additional increase in the variable factor of production, keeping other factors fixed, will eventually reach a point were returns will diminish with every successive unit of factor added.
Hamna
who is the father of Ethiopian Economics?
Tariku
the system of economics
molos Reply
what is economics system
molos
is an arrangement for managing the relatively scarce resources in a particular place and at a particular time
Samuel
but also allocate resources equally ?
Furkan
economic is the study of what
Abba
Economics is a science which studies humam behaviour as a relationship between ends and scarce means which have alternate uses
Samuel
what is the law of equilibrium.
Henry Reply
The law of equilibrium states that when the demand of a commodity is equal to the supply
Stanley
what is demand curve
Gift
demand carve is a graphical representation of the relationship between the price of the or the service and the quantity demanded for a given period of time
Adamsvictor
Is the graphical representation of demand schedule. Also it has negative slope
Abubakary
The law of equilibrium is state that the quantity demand are equal to quantity supply.
Abubakary
sometimes demand exceeds supply or vice versa .In the first situation prices tend to rise therefore supply and demand meet the balance point called as equilibrium .
Furkan
the point of intersection mathematically but this is just an assumption that all other variables remain equal
Deleon
when there is excess supply and demand it means there is forces acting upon the equilibrium and prices should be decreased or increased appropriately
Deleon
The law of equilibrium states that ceteris paribus, at a certain two variables will be equal to each other.
Sessay
scarcity is the wants and desire of people of goods and services with limited resources and purchasing power to get it all
adedokun
The difference between cyclical unemployment and structural unemployment
Prince Reply
Cyclical unemployment .it has to do with an increase in the quantity of good demanded or there is over production which result in fall in prices. Industries will be affected it will now causes retrenchment of workers in the industries while structural unemployment arises as a result of slight change
Adeoti
In the industrial structure of a countries workers wil now be retren
Adeoti
Will now be retrenched as a result of economic recession... That is the little i knw....
Adeoti
what is the condition of a consumer behaviour in the equilibrium under the theory of consumer behaviour
Sahr Reply
what is equilibrium
Sahr
A point where quantity demand & supply meets called equilibrium
Hasham
a state is said to be equilibrium when there is no tendency of movement.
Nibedita
Pls @Nibedita am confused
Prince
The state of balance achieved by an end user of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income.
Okwori
where is the calculations?
Nathan Reply
what are the two conditions for aconsumer to be in the equilibrium under the theory of consumer behaviour in
Sahr
Economic equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point at which supply equals demand for a product,
vinay
Hello there, let's make a time to chat about econimics and its issues.
DA Reply
it's true
Adamsvictor
hie Sir /Madam l need help when it comes to Economics lm doing it for the first time
Thembelani
So, share your problems that you have in terms of economis and we will discuss on it.
DA
Basic Economic problems
Thembelani
what is the Basic Economic problem
Thembelani
what is the Basic Economic problem
Thembelani Reply
scarcity
Rhaiymornd
a bit of explanation please its my first year doing Economics
Thembelani
rare, limited. economic agents eg You dube, the govt & the business entities wants to maximise their utility/satisfaction but because limited resource or scarcity of such resources they are unable to satisfy their needs.
ian
thank u Sir , l understand what you are saying now
Thembelani
limited resources; you wanna take the most benefits from the minimum resource.
DA
if u ar a fresher, eco has to 2 fundamental parts "micro & macro". micro(small) this is were the economc agents ar discussd, economc systms, dmand & supply, typs of market systms etc and the macro (big) part the elucidates the functns of central bank, typs of employmnt, functns of money & int trade.
ian
there is an old adage that says "a picture is worth a thousand words" economics is full of graphing so it requires on the side of the student to master the art of keeping information in form graphs.
ian
oky Sir
Thembelani
scarcity becomes the fundamental problem of economics because of limited resources, when we take an individual, he or she has many wants, thus unlimited wants but can never satisfy all but only few.
Rhaiymornd
now when we take a firm, a firm maybe willing to produce two or more product into the market but due to limited resources they only produce one. the same way if we take the government, he or she maybe willing to bring development either through infrastructures,
Rhaiymornd
that is when consumer decision making rule comes in
Olusegun
choice arises as a result of scarcity of resources
Olusegun
so if we look through, the individual, firm and government, their wants are unlimited but due limited resources, all of their wants cannot be satisfy. therefore scarcity can be term as limited in supply of resources. scarcity is not lack of resources but insufficient resources
Rhaiymornd
there is a marriage with the following; scarcity, factors of production, opportunity cost curve (occ) or (ppc, ppf, tc) production possibility curve productn possibility frontier transformation curve. The OCC, PPC, PPF & TC explains the decisions made by householders, firms & the govt.
ian
opportunity cost also arises as a result of firm willing to produce a particular commodity but resources use in satisfying or producing such output is limited
Olusegun
wat ar those decisions? the most important is WHY nations economise tht is if they hav abundancy of factors of productn eg land, labour & entreprise? now since all of us have unlimited needs against few resourcs PPC, PPF, TC, OCC walks in to make wise allocatn of resources.
ian
how do those decisions made? eg by economic agents; a. Household (You) - if u have R10 & wish to buy a book & a pen & realise that both commodities seĺl at the same price which of the two (2) can u buy (necesity) and which one can u forgo (not all tht important).
ian
b. firms - they allocat mo resourcs to all thoz commoditz tht they think will yield mo profit. c. Govt - if the govt SA was to come in yo area which 1 would u think they can consider first tht can benefit the majority & the minority. So instead of building football stadium they construct a hospital.
ian
if the SA govt had enough resources they would have built both the stadium and the hospital but because of scarce in terms of resources they had to forgo the construction the stadium to build a hospital which is necessary for the majority to benefit.
ian
Opportunity cost well broken down..
Andres
opportunity cost means the lose of other alternatives when the alternative is chosen
saad Reply
is the benefits that you loose by not selecting a certain alternative.
EDWINY
individual wants maybe unlimited, but means to satisfy them are limited there one has to forgo some alternative in order to acquire other alternative and it must according priority, that is when scale of preference set in for individuals to make choice
Rhaiymornd
hello everyone
Aliyu
Next best alternative forgiven
Shoaib

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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